Max Arnold & Sons, LLC v. W.L. Hailey & Co.

• Decision Date: 22 June 2006
• Docket Number: No. 05-5893.,05-5893.
• Parties: MAX ARNOLD & SONS, LLC, Plaintiff-Appellee, v. W.L. HAILEY & COMPANY, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

452 F.3d 494

MAX ARNOLD & SONS, LLC, Plaintiff-Appellee, v. W.L. HAILEY & COMPANY, INC., Defendant-Appellant.

No. 05-5893.

United States Court of Appeals, Sixth Circuit.

Argued: March 14, 2006.

Decided and Filed: June 22, 2006.

ARGUED:

Robert S. Patterson, Boult, Cummings, Conners & Berry, Nashville, Tennessee, for Appellant. Todd E. Panther, Tune, Entrekin & White, Nashville, Tennessee, for Appellee.

ON BRIEF:

Robert S. Patterson, Eric W. Smith, Boult, Cummings, Conners & Berry, Nashville, Tennessee, for Appellant. Todd E. Panther, Shawn R. Henry, Tune, Entrekin & White, Nashville, Tennessee, for Appellee.

Before: MARTIN, SILER, and CLAY, Circuit Judges.

CLAY, Circuit Judge.

Defendant W.L. Hailey & Co., Inc. appeals the March 9, 2005 order of the United States District Court for the Middle District of Tennessee denying Defendant's motion for judgment on the pleadings and granting Plaintiff Max Arnold & Sons, LLC's motion for summary judgment on Plaintiff's claim of breach of contract. For the following reasons, we REVERSE the district court's grant of Plaintiff's motion for summary judgment, AFFIRM the district court's partial grant of Defendant's motion for summary judgment and partial denial of the same motion,¹ and REMAND the case for further proceedings.

I. BACKGROUND

A. PROCEDURAL HISTORY

On February 17, 2004, Plaintiff filed a complaint against Defendant in the United States District Court for the Middle District of Tennessee, alleging subject matter jurisdiction based on diversity of citizenship pursuant to 28 U.S.C. § 1332. Plaintiff alleged that Defendant breached a guaranty agreement between Plaintiff and Defendant.

On April 2, 2004, Defendant filed an answer. On June 4, 2004, Defendant filed a motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c).

On June 28, 2004, Plaintiff filed a response to Defendant's motion for judgment on the pleadings, and Plaintiff filed a motion for summary judgment. Plaintiff submitted two affidavits with its motion: an affidavit from an officer of Plaintiff, and an affidavit from a former officer of Defendant. Plaintiff also submitted with its motion a "Statement of Undisputed Material Facts." On July 28, 2004, Defendant filed a response to Plaintiff's "Statement of Undisputed Material Facts." Plaintiff submitted one affidavit with its response, from an officer of a subsidiary of Defendant.

On March 8, 2005, the district court denied Defendant's motion for judgment on the pleadings and granted Plaintiff's motion for summary judgment. On March 21, 2005, Defendant filed a motion to alter or amend the district court judgment pursuant to Federal Rule of Civil Procedure 59(e). The district court denied this motion. On May 20, 2005, Defendant timely filed a notice of appeal.

B. FACTS

Plaintiff is a Kentucky corporation that sells petroleum products. Defendant is a Tennessee corporation that specializes in the construction of "large underground utility and treatment plant projects." (J.A. at 16.) On June 30, 2000, Defendant acquired A.J. Hall Oil Company, Inc. ("A.J. Hall"), a Tennessee corporation that sells petroleum products in middle Tennessee.

Plaintiff held a Chevron Lubrication Marketer Agreement for an eight-county region in middle Tennessee. In 2001, A.J. Hall was looking to acquire a small lubricants company with an existing customer base to increase its lubricants business. A.J. Hall took particular interest in Plaintiff's middle Tennessee operations. In 2001, Rusty McDonald ("McDonald"), the president of A.J. Hall, contacted Phil Russo ("Russo"), vice president of sales and marketing of Plaintiff, to discuss a possible purchase of Plaintiff's middle Tennessee operations. During negotiations, McDonald, Russo, and James Bryant ("Bryant"), corporate secretary and treasurer of Defendant, executed a memorandum of understanding on September 10, 2001. The memorandum expressed an understanding that Plaintiff would sell its middle Tennessee operation to A.J. Hall, with the primary consequence being A.J. Hall's ability to sell Chevron lubricants in that area.

Chevron, however, was unwilling to completely switch its business from Plaintiff to A.J. Hall. Chevron had a long history of successful business dealings with Plaintiff, but it had no experience in dealing with A.J. Hall. Chevron wanted some assurance of consistent performance in the transition from Plaintiff to A.J. Hall, and Chevron insisted that Plaintiff stay on in a transitional role. As a result, Plaintiff and A.J. Hall agreed to form a new company, W.L. Hailey Oil Services, LLC ("Hailey Oil Services"). Plaintiff would have a 30% membership interest in Hailey Oil Services, and A.J. Hall would have a 70% interest in the company.

On November 27, 2001, Plaintiff and A.J. Hall executed an operating agreement for Hailey Oil Services. In relevant part, the agreement stated:

1.1 Definitions.

(c) "Cash Flow" of the Company shall mean the Company's taxable income for federal tax purposes, increased by (i) amortization, depreciation and other noncash charges taken into account in computing taxable income, (ii) any nontaxable income or proceeds from any refinancing of the Company's indebtedness (other than capital contributions) and (iii) the net proceeds from the sale of any of the Company's assets, and reduced by (iv) principal payments on Company indebtedness, (v) any other cash expenditures which have not been deducted in determining the taxable income of the Company and (vi) any amount that the Board of Governors determines to be reasonably required to maintain sufficient working capital and a reasonable reserve for operating expenses. The Cash Flow of the Company shall be determined separately for each fiscal year and not cumulatively.

. . .

6.1 Distribution of Cash Flow. Subject to the provisions of the [Tennessee Limited Liability Company] Act, Cash Flow generated from Company operations shall be distributed to the Members within 30 days of the end of each calendar quarter in accordance with the Percentage Interests of the Members, except that, to the extent Max Arnold's share of Cash Flow for any of the first four calendar quarters of operation is less than $33,750, A.J. Hall's share of Cash Flow shall be reduced and Max Arnold shall receive Cash Flow equal to $33,750. To the extent that Cash Flow for any of the first four calendar quarters of operation is less than $33,750, Max Arnold's share of Cash Flow for the following calendar quarter(s) shall be increased until such time that Max Arnold's share of Cash Flow for each of the first four calendar quarters of operation is equal to $33,750 per quarter.

. . .

14.5 Net Equity.

(c) . . . Notwithstanding anything to the contrary herein, the Net Equity of Max Arnold's interest shall be equal to One Hundred Thirty-Five Thousand Dollars ($135,000) less any and all distributions made to Max Arnold pursuant to Section 6.1.

. . .

15.1 Purchase. A.J. Hall shall purchase all of the Membership Interest of Max Arnold and Max Arnold shall sell all of its Membership Interest on the date which is twelve (12) months from the date of this Agreement if the Company shall hold a contract from Chevron enabling it to market, sell and distribute Chevron lubricant products in the Middle Tennessee Area on such date.

15.2 Purchase Price. In exchange for the Membership Interest of Max Arnold, A.J. Hall shall pay to Max Arnold an amount equal to One Hundred Thirty-Five Thousand Dollars ($135,000) less all distributions from the Company to Max Arnold pursuant to Section 6.1.

(J.A. at 21-22, 29, 48.) In short, the operating agreement created two separate obligations to Plaintiff. Under Section 6.1, Hailey Oil Services was required to pay cash flow distributions to Plaintiff. Under Sections 15.1 and 15.2, A.J. Hall was required to pay Plaintiff $135,000, less any cash flow distributions, one year after the execution of the operating agreement, i.e., November 27, 2002, if Hailey Oil Services had a lubricants contract with Chevron at that time.

On the same day, Plaintiff and Defendant entered into a guaranty agreement. In relevant part, the guaranty agreement stated:

NOW, THEREFORE, in consideration of the mutual promises and benefits to be derived by parties hereto from the operation of the business known as W.L. Hailey Oil Services, LLC, W.L. Hailey Company, Inc. hereby guarantees the prompt and full payment of any financial obligation which is due and payable to Max Arnold & Sons, LLC pursuant to that certain Operating Agreement dated the 27th day of November, 2001, of W.L. Hailey Oil Services, LLC.

By the execution of this Agreement, W.L. Hailey Company, Inc. specifically guarantees the payment of the distributions of cash flow to Max Arnold & Sons, LLC, as set forth in Section 6.1 of said Operating Agreement; . . . and the purchase of the membership interest of Max Arnold & Sons, LLC by A.J. Hall as set forth in Section 15.2 of the Operating Agreement.

(J.A. at 54-55.) On the same day, Plaintiff and Hailey Oil Services entered into a non-compete agreement.

On December 1, 2001, Chevron executed a marketing distribution agreement with Hailey Oil Services. The relationship between the parties seemed to be running smoothly. On March 1, 2002, Hailey Oil Services paid Plaintiff $35,425.70, which included $33,750 for the first calendar quarter cash flow distribution check under Section 6.1 of the operating agreement, as well as additional money for equipment and inventory.

After the initial payment, Hailey Oil Services failed to pay Plaintiff cash flow distributions; however, there is no evidence in the record that Hailey Oil Services generated a positive cash flow in the remaining three calendar quarters. Moreover, on or about April 25, 2002, Chevron notified Hailey Oil Services of its intent to cancel the lubricants distribution agreement with Hailey Oil Services. The cancellation became effective on June 23, 2002. Bryant, now a...